This 26-Year Old Founder Is Raising $100 Million To Take On Giants Like Microsoft

Aaron Levie is unusual
for a 26-year-old CEO—he's much more excited about business
software than consumer products like Foursquare.

Levie founded Box.net, an
online service for sharing and collaborating on documents and
other files, in 2005.

About three years in, he looked at the company and saw a split
between consumers and business users. He realized he would have
to choose one or the other, and banked on enterprises.

It turned out to be the right move: Box.net
has made the turn from being used by individuals and small
departments to selling directly to CIOs, and is winning contracts
away from giants like Microsoft—the
company just got an 18,000-seat deal with Procter & Gamble.

In fact, the company's customers are growing so fast that Box
recently filed for a new $35 million round—just months after
closing a $48 million round in February. The company is on
track to have more than $100 million in funding at a
$500 million valuation. It's also overflowing its current
headquarters with more than 240 employees, and is planning to
move into a new space early next year.

We caught up with Levie last week to ask him about Box and why
enterprise startups are the best-kept secret in tech.

Here's some of what we talked about:

Why most startups are focused on consumers.
"When you're 22 years old or 25 years old—the Y
Combinator demographic—you have no context for the
enterprise. If you're in your early 20s and you're hanging out
with a bunch of other people in their early 20s, nobody has a
sense of the kinds of problems that 'real workers' run into
every day. They're running into a completely different set of
problems like 'what's the party going on right now that I
should be going to? What are my friends looking at on the
Internet that I want to read? How do I share photos and
videos?'
That's their frame of reference for life."

Selling to businesses is much more exciting—and a
better business. "In the consumer market, we were
making it easier to get to a file from a device, or another
computer, or to be able to look up your photos. That was very
interesting, but it wasn't 10x innovation. Within the
enterprise, if you compare Box to something like IBM
Filenet, or Microsoft
SharePoint, you get almost a 10x improvement on productivity,
speed, time to market for new products. So we saw an
opportunity to create real innovation in that space and that's
what got us excited....We think the market for enterprise
collaboration will be much larger than the market for checking
into locations on your phone."

Companies should focus on what they're good
at. "A jack of all trades is a master of none....What
you saw with the suite product from Microsoft [Office 365], they're trying to
bundle ERP, CRM, collaboration, e-mail, and communication all
as one package. If you go to the average company in America,
that's not what they've implemented. They've implemented
Salesforce
as their CRM, Google
Apps for email—a large number of them, in the millions—they'll
be thinking of Workday or NetSuite for their ERP. Each of those
companies is or will become a multibillion-dollar company just
focused on that best-of-breed aspect of what they're trying to
solve."

Which is why Google+ will fail. "Google
wants to move into social. Do you really think they're going to
be able to do that? My bet is no. I think that Facebook
will block them out. Maybe if Google buys Twitter,
that could work. But the way our brains work and the way
companies can manage areas, the companies that tend to succeed
do when they have that level of focus....The
dynamic with social is you tend not to have products with 30%
market share. It's all or nothing. Email works because we have
open standards that let you communicate across any email
client. But with something like Google+, you really are going
to have 5%, Robert
Scobleand
you and some other digerati, but unless you get over that
curve to my mom, you're really going to have a hard time
getting the full scale you need."

Time is on his side—and working against Oracle
and Microsoft. "Companies that keep customers captive
because of contracts aren't always the hardest to disrupt.
Ultimately, it doesn't create a great customer-vendor
relationship. There's a lot of fractures in the market where
that exists. I wouldn't mind being a Workday or a NetSuite
going up against Oracle
customers because Oracle has had now 20 years of these very
difficult tenuous customer relationships. There are literally
lawsuits from vendors to customers and customers to vendors in
that industry. It's kind of a crazy industry because there's
this asymmetry where you'll sell software to an enterprise, and
they will pay you regardless of whether that's successful or
not. That's entirely unlike SaaS where
customers will only pay us if we're successful."

One reason Steve
Jobs will be irreplaceable. "I think for the next
5 to 10 years Apple
will perform just fine. But what was the next device category
that he would have created—it won't come to the market with as
much credibility. Just think about our company. Within minutes
of watching the iPad
keynote last January, we put a team on building an iPad
app....for no other reason that Steve
Jobs was behind it, we felt confident that we could build
an app for this thing because he will make it go to
market....If you only follow him every time he did something,
maybe 20% of the time you'd go down the wrong path, but the
vast majority of the time you'd be successful."

Aaron
Levie: We are in the process of doing a fund raise,
it will bring up the total to over $100 million, but we've only
done about $18 million of that piece.

BI: But you're hoping to raise $35 million this
time.

AL: The SEC requires
you to state how much you anticipate raising, so that's a fairly
flexible number, but that's what we're saying.

BI: How's business? Are you cash-flow positive?

AL: I can't talk about that
part, but I'll give you a little context. We did our Series D in
February of this year. It's an imperfect process when you're a
startup, you try and map out what kind of revenue targets and
user targets you're going to hit. In December of 2010, we're
modeling what we're going to try to do and we decide we're going
to raise a Series D to fund that growth. That was February 2011.
Subsequent to that, in Q1 and Q2 we exceeded our numbers on key
targets—whether it was revenue, or deal sizes—even from what we
planned only a couple months ago. So we could see the amplitude
of our business changing. With a business like ours where you
need a lot of infrastructure, you're doing customer acquisition
up front, where you're building out a pretty large organization,
that has implications from a cashflow standpoint. So we decided
we would raise additional capital to grow even further.

BI: Was that mainly from the Procter &
Gamble deal?

AL: It's a proxy for the market
in general. P&G is the one we wanted to put out there
publicly, it's 18,000 users on P&G. That's representative of
this massive change that's happening in this market. Two or three
years ago, we primarily sold to departments in businesses, teams
in organizations. With the P&G deal and this new category of
sales we're doing, we're selling to the CIO. They're really
seeing this as infrastructure, as part of the organization. That
changes a lot of things. It changes the technology we have to
build, and it changes the deal structure that you're working on.

BI: You said you're spending a lot on
infrastructure. So you're not one of those startups that runs
everything off Amazon Web
Services?

AL: We are not your traditional
"everything's on Amazon" company. We use their cloud for key
pieces of our process, but we have two data centers. If you think
about it, a Procter & Gamble, the kind of security and
compliance requirements they have to store data off premise, they
have to be able to really make sure they can go audit, they have
to know all the processes that go into the infrastructure. That's
something we can't get out of working with an outside vendor. We
have to do that ourselves.

BI: I also noticed that you're hiring a lot of
direct sales people. That's quite different from typical
cloud-based business startups where everything's self-service.
Why do you think that approach is right for you?

AL: For products purely used by
individuals and teams, self-service is brilliant. If I'm a user
of a piece of technology and I just want to start to use it, I
either I want a free version or something I want to pay for with
my credit card. Same thing if I'm a small group or a team, I want
to get on that technology. We have that—we have a freemium
business model, and that's the biggest driver of our business,
the free product.

With the kind of technology we're selling, we're also being
implemented as THE sanctioned and provisioned tool for the whole
enterprise. You can't do that through a Web interface. That's
actually true, high enterprise-grade consulting, you have to work
with that CIO and say "how are we going to come up with an
implementation strategy for your organization? How are we going
to make sure it's integrated at the right depth with your
internal processes and technology. That can only come if we have
a very sophisticated sales and service process with your client.

AL: We're still a fly buzzing
around in their world. We'd like to become a bigger one.

[At this point, somebody tries to come into the conference room
where we're having this interview. Levie very politely asks them
to go somewhere else.]

AL: Actually, that's the only
thing I exploit. I don't do the special parking spot, I sit right
next to the QA team, but I do exert power over using conference
rooms.

BI: Who do you view as competitors in the
startup space? Is Dropbox a
competitor?

AL: I see them as a complement
and competitor. We have plenty of people who use both of our
products. We tend to be an active collaboration service on top of
storage. We fundamentally have to store data and lots of it,
because what you're collaborating around is content. But the
interface, the value that we sell to organizations is that you
can share this information rapidly. So the way I think about it
is, Dropbox
is great for synchronizing the few devices you use around. We're
really a product that helps you share information around lots of
people, lots of devices, lots of applications. To the end user,
we overlap because we also make it easy to get to your
information from anywhere, but that's really where they stop and
we begin. They also go much deeper into things like consumer
technology—how do I integrate with my Xbox and
video player?Box.net's first big banner
advertisement, now located in company
headquarters.Matt Rosoff Business
Insider

So the biggest player in this space is Microsoft SharePoint.
That's what we're really focused on going after.

AL: We love Jive. They're more
social collaboration. While you can be social on Box, that's not
our overwhelming value proposition. It's really around content
scale. Say your sales organization has 50,000 contracts and you
want to share and search them—that's what we excel at. But if
your sales team has ideas of new products to get to market,
that's more of what Jive is doing. Or Yammer,
or
Chatter (from Salesforce.com).

BI: What about Salesforce? It seems like you might start to
run into them at the margins.

AL: The space is still very
nascent. So originally you could have probably said that YouTube,
Twitter,
and Facebook
all compete with each other. You could have said that Facebook video competes with YouTube.
But you can use all of those services complementarily. So you
could be sharing your content on Box and being social on Yammer or
Jive, and those services tend to complement each other very
nicely.

BI: Looking 10 years down the road, do you see a
shakeout as companies start to come out with these Microsoft-type
bundles of services?

AL: A jack of all trades is a
master of none. That's what happens with these products, the
suite products. What you saw with the suite product from
Microsoft, they're trying to bundle ERP, CRM, collaboration,
e-mail, and communication all as one package. If you go to the
average company in America, that's not what they've implemented.
They've implemented Salesforce as their CRM, Google Apps for
email—a large number of them, in the millions—they'll be thinking
of Workday or NetSuite for their ERP. Each of those companies is
or will become a multibillion-dollar company just focused on that
best-of-breed aspect of what they're trying to solve. With the
Web, you can connect these properties together, you can connect
this information together, so you don't actually take a
productivity hit by having different services. There might be a
slight management complexity, but there's new technology that
helps with that, like Octa and SnapLogic.

BI: But in 10 years—Wall Street rewards growth,
eventually there's the temptation to move into adjacent markets.

AL: It will. It will. But let's
take the Google example. Google wants to move into social. Do you
really think they're going to be able to do that? My bet is no. I
think that Facebook will block them out. Maybe if Google buys
Twitter, that could work. But the way our
brains work and the way companies can manage areas, the companies
that tend to succeed do when they have that level of focus.

BI: Our first take was "Google
Bing." If they get 30% share, they'll probably be happy.

AL: The dynamic with social is
you tend not to have products with 30% market share. It's all or
nothing. Email works because we have open standards that let you
communicate across any email client. But with something like
Google+, you really are going to have 5%, Robert
Scoble and you and some other digerati, but unless you get
over that curve to my mom, you're really going to have a hard
time getting the full scale you need.

So that's why I wouldn't mind being Facebook in this situation.

BI: Speaking of Google, why do you think they
haven't made a bigger play for the enterprise?

AL: It's something I've thought
a lot about—Larry Page
has really not set an aggressive agenda around the enterprise.
Almost to the extent that you start to think maybe that was just
Eric Schmidt's baby side project, it was not a core focus of the
Google guys. I can't answer "why," but I can answer how they show
up in the market, and when they show up making Google+ the
number-one focus area and then they go and buy Motorola,
these are not the actions of a company that's super-focused on
the enterprise.

We don't necessarily have a problem with that—we want them to
keep Microsoft honest with things like Gmail, and
we want them to help accelerate the move to the cloud, we think
they're an important force in that. But we actually think of them
as a great partner. We have integration with Google Docs, we're
big supporters of Android,
we were in the Chromebook keynote they had at I/O. We think
of them as a technology partner.

BI: In general it seems like enterprise-focused
startups are underappreciated. You go to incubators and demo
days, and there are 50 flavor-of-the-week consumer startups, and
a lot of them get funding. Why is that?

AL: It's an interesting
anthropology experiment. When you're 22 years old or 25 years
old—the Y
Combinator demographic—you have no context for the
enterprise. If you're in your early 20s and you're hanging out
with a bunch of other people in their early 20s, nobody has a
sense of the kinds of problems that real "workers" run into every
day. They're running into a completely different set of problems
like "what's the party going on right now that I should be going
to? What are my friends looking at on the Internet that I want to
read? How do I share photos and videos?" That's
their frame of reference for life.

When you either work in an organization or building up a
company—now we're at 240 employees, so our frame of reference is,
we have to make it really easy for 240 people to share
information. We're building a product we want to run. That
changes the excitement level you can have around building
enterprise software because you can directly see how it can
impact work and how it can change.

That's how we stumbled into this, I think you're right it's
underappreciated. People aren't aware of how much innovation is
happening and could be happening in the enterprise. This [move to
the cloud] is the biggest change we'll see in the enterprise,
ever.

BI: At least since the move from mainframe to
client-server, right?

AL: That was a dramatic change,
but I actually think the value you'll get from this technology
will be substantially more because you can be more social, more
mobile, more open. There are just a lot of aspects to this
technology that are groundbreaking.

BI: How did you get that enterprise DNA? You
started Box out of college—do you have somebody who secretly
worked at IBM or
SAP
on staff?

AL: It's no secret. We do have
some ex-EMC people
here, we have ex-Oracle people here. Plus, have you seen my grey
hair? I'm totally enterprise now.

We basically got to this juncture early on, we have both consumer
and business users of our product and we need to decide what
we're going to be when we grow up. A business-focused company? Or
a consumer-focused company? The amount of effort we would have to
put into either category would need to be disproportionate to the
other for us to be successful. We decided when we looked at our
userbase, we saw a more compelling opportunity and more
compelling value proposition to go after the enterprise.

In the consumer market, we were making it easier to get to a file
from a device, or another computer, or to be able to look up your
photos. That was very interesting, but it wasn't 10x innovation.
Within the enterprise, if you compare Box to something like
IBM
Filenet, or Microsoft SharePoint, you get almost a 10x
improvement on productivity, speed, time to market for new
products. So we saw an opportunity to create real innovation in
that space and that's what got us excited.

Now we hear from customers, companies that use Box to sit in
between dozens of partners and people outside their network that
need to share information, we're getting new projects to market
much faster. Audi uses us—we get cars to market faster. There's
really exciting stuff that happens when you get used in the
enterprise.

BI: I guess it's the question of a huge number
of consumers x a tiny amount of revenue, versus a large number of
businesses x a much larger amount of revenue.

AL: We think the market for
enterprise collaboration will be much larger than the market for
checking into locations on your phone.

BI: I saw you talk at an event with a group of
other enterprise startups last week, and it came up toward the
end of the conversation that big packaged-software companies like
Oracle and Microsoft are doomed. Do you think that's true?

AL: We have insufficient data
to know what happens with software companies that are on their
next-generation paradigm. Let's look at Oracle. Larry
Ellison has been driving that company for the last 30 years.
It's been a machine and he's been this relentless, maniacal kind
of person who can just execute on these big visions. We don't
know what Oracle looks like 10 years from now, if you have some
overall evolution of paradigm and leadership and process.
Companies like IBM and
HP
have had to completely reinvent themselves to stay relevant. I
think we now are at this inflection point where there's a gap in
the market, we have this next generation of companies that's
emerging—particularly cloud-based companies like Workday, we
think like Box, like Yammer,
like Jive, like Salesforce.com—it's usually in those marketplace
transition points that new technology companies emerge. We think
that will be an overwhelming force in the marketplace over the
long period of time that will change in the structure of their
leadership.

That doesn't mean Oracle goes away. That doesn't mean Microsoft
goes away. What it means is that they might look different 10
years from now than it did 10 years ago where they were the de
facto standards in the space. There's plenty of evidence to
suggest that it's very hard to parlay success in one paradigm
into success in another because most of the rules of the game
have completely changed.

Like how we distribute our products is totally different from how
Oracle and Microsoft distribute their products—we're direct to
the customer, we're all over the Internet, you don't have to go
through a whole network and channel of distribution. The way our
applications are built—we release updates to our products every
week. Microsoft takes 3 years to release a new product. So the
whole DNA of our company is completely different. That will take
some time to cycle it into Oracle and Microsoft. By then,
companies like Salesforce, companies in our category and peer
group, will have built those foundations.

BI: When you go into enterprises, do you find
that those companies have pre-existing relationships that serve
as a barrier to entry for you? Maybe a CIO would say "we love
your product, but we already have a three-year agreement with
Microsoft for SharePoint, so we're just going to go with that."

AL: The good thing is time is
generally on our side. That [agreement] will expire and the
customer will be ready to jump when it does. Companies that keep
customers captive because of contracts aren't always the hardest
to disrupt. Ultimately, it doesn't create a great customer-vendor
relationship. There's a lot of fractures in the market where that
exists.

I wouldn't mind being a Workday or a NetSuite going up against
Oracle customers because Oracle has had now 20 years of these
very difficult tenuous customer relationships. There are
literally lawsuits from vendors to customers and customers to
vendors in that industry. It's kind of a crazy industry because
there's this asymmetry where you'll sell software to an
enterprise, and they will pay you regardless of whether that's
successful or not. That's entirely unlike SaaS where
customers will only pay us if we're successful. That's the
recurring nature of the model. So we think there's a completely
different business model in this new world.

BI: You guys had a deal to bundle 50GB of
storage for free with the HPTouchPad. What do you think
about
HP's big move? Did it catch you off guard?

AL: It was intense. We were
very much caught off guard given that we were a partner of
HP and
still are. We like them as a partner, we think they're very
strong at market execution. I am a little surprised they're
willing to pull back on the device side of WebOS so soon.
Particularly because you didn't see it through a full cycle of
consumer adoption. But I'm positive Leo has a
strategy from all of this. What they're going through is very
interesting—it's sort of a cataclysmic change where they're
driving that company to become more of a software powerhouse than
a hardware powerhouse. That takes a lot of acquisitions, changing
in DNA, changing in people in the organization, it'll be
interesting to see how they execute.

AL: To be honest, that was more
surprising than the WebOS shutdown. Particularly if the claim is
that HP wants to go more cloud—that's not the
most logical sequence to get there....I think they'll be able to
make the acquisition work, I don't think it's going to be an
unsuccessful acquisition, but I don't think it accelerates their
story for cloud computing.

BI: Did the firesale on TouchPads benefit you
guys?

AL: We saw a dramatic spike in
WebOS activations.

BI: I saw that you posted on
Steve Jobs recently. Anything you want to say on his
retirement? [This interview was conducted the day after Jobs
stepped down.]

AL:Steve Jobs is the most epic entrepreneur of all
time. He served as a guiding light for any emerging
businessperson who wanted to learn how things should get done.
He'll be looked at as one of the best business leaders of all
time, and certainly one of the best tech entrepreneurs.

BI: Will Apple be
able to continue to churn out successful products without him at
CEO? Has he been able to get his DNA into the company?

AL: The principles that Steve
Jobs lives by, it's not like that can't be replicated. What Steve
Jobs had was strong principles that anybody can replicate, but an
amazing gut and intuition. Somebody like Jonathan
Ive, a guy like him can probably maintain that kind of design
principle for however long he's there. You can replicate a lot of
the key individual things. It's really the way it all comes
together as one symbiotic organism that Steve is uniquely capable
of doing. If they can get a leader who says our Apple stores, our devices, our software, it all
feels amazing, then we can continue that legacy. I think for the
next 5 to 10 years Apple will just perform just fine. But what
was the next device category that he would have created—it won't
come to the market with as much credibility.

Just think about our company. Within minutes of watching the
iPad keynote last January, we put a team on
building an iPad app. The thing looked amazing, but for no other
reason—this is how much credibility this guy had—for no other
reason that Steve Jobs was behind it, we felt confident that we
could build an app for this thing because he will make it go to
market. You don't get that kind of confidence with a lot of
people because he had a track record, if he says something is
going to happen, he will make sure the marketplace buys it,
adopts it, spreads it, and so on. If you only follow him every
time he did something, maybe 20% of the time you'd go down the
wrong path, but the vast majority of the time you'd be
successful.